AUD/NZD taking a breather before the next leg higher, awaiting the RBA

AUD/NZD has been moving to the upside as the market favours the Aussie for its yield advantage and divergence between the Reserve Bank of New Zealand and the Reserve Bank of Australia. At the time of writing, the pair is trading at 1.0804 within a range of 1.0788 and 1.0811 the high. 

All eyes on RBA

Today is the Reserve Bank of Australia and the sentiment surrounding the Aussie is supporting the cross higher, en-route to the May highs in the 1.0830s. The RBA is expected to leave policy on hold but there will be a particular interest to the bank's forecasts and how far away they are from implementing negative rates. Such divergence from other central banks racing to the bottom is giving the Aussie an advantage. 

With the RBA continuing to rule out negative rates, the cash rate is set to remain at its current level until at least 2023, but we assess that the bond target will be lifted during 2022. Governor Lowe said last week that the economy appeared to be tracking either in line with May’s quarterly forecasts, or a little better. The RBA Board might also express some concern over the steep rise in AUD,

analysts at Westpac explained. 

• RBA Preview: Not enough to kick-start anything in AUD/USD at make-or-break levels (Since publishing, AUD has rallied towards 0.6820 targets). 

At this juncture, the market may consider the Aussie as somewhat overdone. The geopolitical environment is bearish and the moves in the antipodeans come despite the obvious risks in a flare-up of trade tensions between the US and China. Spot FX has not been representative of the net AUD short positions which had increased for a third week according to positioning data. 

'We expect the full whack of the global slowdown and the fractious US/China relations to bear down on the AUD in the months ahead and maintain the view that AUD/USD faces the prospect of a potential sharp dip lower on a 3-month view," analysts at Rabobank argued, a factor that would also weigh on the bird. 

AUD/NZD levels

The pair are meeting a daily resistance and there is a prospect of a 50% mean reversion to the prior late May highs around 1.0750. However, short term conditions are not bearish yet and 1.0790/80 offers support structure.